Why is it better to underperform than lose money

Many investors believe—wrongly—that irrespective of how the economy performs, the market will move only in one direction: upwards!

I continue to be apprehensive about the state of our equity market.

Just as in life, there are ups and downs in the market too. If you are rational, an underperformance will not disturb you. Just look at an IPO of Rs.400 crore that gets oversubscribed 180 times and collects Rs.52,000 crore shows how market become mad.Anchor investors may make money, but retail investors end up being stuck with stock..

Some stocks today are flying high even though they lack good fundamentals, as money chases the mid- and small cap stocks. Investors pump considerable sums of money through Systematic Investment Plans into mid-and small-cap funds. Some fund managers are a worried lot, but still accept fresh money.

But when investors such as you come to us, we are clear about one thing: we stick to asset allocation instead of getting swayed by the way the market moves and blindly rush into small- and mid-caps.

What prompted me to write this newsletter is because a retired person who is short of meeting his monthly income wanted us to invest more than 70 per cent of his hard-earned retirement money into mid-and small caps. He wanted to withdraw money from that every month to meet his shortfall. His argument—without evidence—was that such funds will outperform large caps funds over a long period. But he failed to understand that any market movement will not be a one sided and volatility is part of the equity market.

If you let your emotions rule and invest irrationally, you may react differently when the market turns in a short period of time.

Liquidity and valuations always travel in two different in direction and, at times, there is even no justification for a rally in market. Yet, people often find ways to justify the market movement.

Yet, with all the analysis and research that my colleagues and I do, if we capture 80 per cent of the upside market movement, we are happy.  We are rational always and are ready to underperform during the last leg of the rally so that we can preserve your hard-earned money during a correction when other lay investors might be fearful.

So, take our advice: You may under perform sometimes, but you will not lose money. Investing is all about making money and not losing it.